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Item 2. Management’s Discussion and Analysis

2024-08-09 compared with 2024-05-10 · 345 added, 254 removed, 572 unchanged (51% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of Community Bank System, Inc.

(the “Company” or “CBSI”) as of and for the three months ended March 31, 2024 and 2023, although in some circumstances the fourth quarter of 2023 is also discussed in order to more fully explain recent trends.

(the “Company” or “CFSI”) as of and for the three and six months ended June 30, 2024 and 2023, although in some circumstances the first quarter of 2024 is also discussed in order to more fully explain recent trends.

The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and related notes that appear on pages 3 through 40.

All references in the discussion of the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole.

Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2024, “last year” and equivalent terms refer to calendar year 2023, “first quarter” refers to the three months ended March 31, and earnings per share (“EPS”) figures refer to diluted EPS.

Unless otherwise noted, the term “this year” and equivalent terms refers to results in calendar year 2024, “last year” and equivalent terms refer to calendar year 2023, “second quarter” refers to the three months ended June 30, 2024, “YTD” refers to the six months ended June 30, 2024, and earnings per share (“EPS”) figures refer to diluted EPS.

This MD&A contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company.

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Qualitative adjustments are made for differences in loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquisition status, current levels of delinquencies, net charge-offs and risk ratings, as well as actual and forecasted macroeconomic variables.

Macroeconomic data includes unemployment rates, changes in collateral values such as home prices, commercial real estate prices and automobile prices, gross domestic product, median household income net of inflation and other relevant factors.

Macroeconomic data includes unemployment rates, changes in collateral values such as home prices, commercial real estate prices including office property-specific price forecasts, office property-specific vacancy rates, automobile prices, gross domestic product, median household income net of inflation and other relevant factors.

Management utilizes judgment in determining and applying the qualitative factors and weighting the economic scenarios used, which include baseline, upside and downside forecasts.

During the first quarter of 2024, the Company updated the ACL model to add 2023 results into the historical data used for calculating the quantitative and qualitative factors as part of the annual model update procedures.

During the second quarter of 2024, the Company updated the ACL model to incorporate office property-specific price forecasts and office property-specific vacancy forecasts to provide greater precision to the model.

One of the most significant estimates and judgments influencing the results of the ACL calculation is the macroeconomic forecasts.

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To illustrate the sensitivity of the ACL calculation to these economic forecasts, management performed a hypothetical sensitivity analysis using a weighting of 100% to the downside forecast, rather than the existing weighting of baseline, upside and downside of 40%, 30% and 30%, respectively.

The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at March 31, 2024 were 4.5% and 1.9%, respectively, compared to 4.5% and 1.7% at December 31, 2023, respectively.

The scenario-weighted average unemployment rate and GDP growth forecasts used in the ACL model at June 30, 2024 were 4.6% and 1.8%, respectively, compared to 4.5% and 1.9% at March 31, 2024, respectively.

The hypothetical downside forecast includes assumptions of a weakening economy represented by a cumulative decline in real GDP of 2.6%, enhanced geopolitical tensions, elevated inflation, a peak unemployment rate of 8.0% and an average unemployment rate of 6.6%.

The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three months ended March 31, 2024 by approximately $4.4 million, and decrease net income by $3.3 million (net of tax).

The Company calculated that this hypothetical scenario would increase the ACL and provision for credit losses as of and for the three and six months ended June 30, 2024 by approximately $4.6 million, and decrease net income by $3.5 million (net of tax).

This change is reflective of the sensitivity of the various economic factors used in the ACL model.

The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate at the same time that economic conditions are changing, which would affect the results of the ACL calculation.

The impact that the economic factors have on the model is affected by the severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments.

The resulting difference is not intended to represent an expected increase in allowance levels, as future conditions are uncertain and there are several other quantitative and qualitative factors that will also fluctuate concurrent with changing economic conditions, which would affect the results of the ACL calculation.

The impact that the economic factors have on the model is affected by the upside or downside severity of the scenarios used, the product type mix, and the interaction of the economic factors with other quantitative and qualitative factors in the model, as changes in any particular factor or input may not occur at the same rate or be directionally consistent across all loan segments.

Improvements in one factor may offset deterioration in other factors, both qualitative and quantitative.

The third-party downside economic forecast used in the hypothetical scenario described does not predict a severe economic downturn, but rather a moderate recessionary environment.

The Company’s geographic distribution of loans outside of major metropolitan areas, combined with low statistical correlation between historical losses and national economic indicators, results in changes to the allowance that are less significant as compared to national economic activity.

The Company’s geographic distribution of loans primarily outside of major metropolitan areas, combined with low statistical correlation between its historical losses and national economic indicators, results in changes to the allowance that are less significant as compared to national economic activity.

Supplemental Reporting of Non-GAAP Results of Operations

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The prior period has been recast to conform to the current period presentation.

Results on an “operating” basis exclude the after-tax effects of acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain on equity securities and amortization of intangible assets.

Results on an “operating” basis exclude the after-tax effects of acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain (loss) on equity securities and amortization of intangible assets.

Results on a “tangible” basis exclude goodwill and intangible asset balances, net of accumulated amortization and applicable deferred tax amounts.

Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions or restructuring activities.

In addition, the Company provides supplemental reporting for “operating pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain on equity securities and amortization of intangible assets from income before income taxes.

In addition, the Company provides supplemental reporting for “operating pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, litigation accrual, gain on debt extinguishment, loss on sales of investment securities, unrealized gain (loss) on equity securities and amortization of intangible assets from income before income taxes.

Although operating pre-tax, pre-provision net revenue is a non-GAAP measure, the Company’s management believes this information helps investors and analysts measure and compare the Company’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the impact of CECL, helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions or restructuring activities.

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and the performance of recently acquired businesses.

First quarter net income increased $35.1 million as compared to the first quarter of 2023 and earnings per share of $0.76 for the first quarter of 2024 increased $0.65 from the first quarter of 2023.

The increase in net income and earnings per share for the quarter was primarily the result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale investment securities realized during the prior year’s first quarter in connection with a balance sheet repositioning.

In addition, increases in noninterest expenses, the provision for credit losses and income taxes and a decrease in net interest income were partially offset by an increase in noninterest revenues and a decrease in the number of fully diluted shares outstanding.

First quarter operating net income, a non-GAAP measure, decreased $5.9 million, or 11.9%, as compared to the first quarter of 2023.

Operating earnings per share, a non-GAAP measure, of $0.82 for the first quarter decreased $0.10 compared to the first quarter of 2023 while operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, decreased $0.04 compared to the prior year’s first quarter.

Net interest margin and fully tax-equivalent net interest margin, a non-GAAP measure, decreased 22 basis points between the first quarter of 2023 and the first quarter of 2024.

The yield on average interest earning assets increased 61 basis points compared to the prior year first quarter as the yield on average loans and yield on average investments both improved.

The yield on average loans for the first quarter increased 66 basis points compared to the first quarter of 2023, driven by market-related increases in interest rates on new loans, an increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and a high level of new loan originations.

The yield on average investments, including cash equivalents, increased 16 basis points compared to the prior year, which also benefitted from higher market interest rates as well as the maturities of certain lower-yielding available-for-sale investment securities between the periods.

The Company’s total cost of funds increased 87 basis points from the year earlier period, as the rate paid on interest-bearing deposits increased 111 basis points and the rate paid on borrowings increased 103 basis points due in most part to market-driven increases in deposit and borrowing rates, as well as the higher proportion of funding coming from comparatively higher rate time deposits and external borrowings, including the Company’s utilization of the Federal Reserve’s Bank Term Funding Program during the first quarter of 2024.

Loan balances increased on both an average and ending basis as compared to the prior year first quarter, reflective of continued strong organic loan growth.

Deposit balances also increased on both an average and ending basis as compared to the first quarter of 2023 due primarily to growth in public fund deposit balances.

Investment balances, including cash equivalents, decreased on both an average and ending basis between the first quarter of 2023 and the first quarter of 2024 primarily due to the maturities of certain lower-yielding available-for-sale investment securities between the periods, partially offset by higher interest-earning cash balances.

Borrowing balances increased on both an average and ending basis compared to the prior year first quarter reflective of the Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings during 2023 to support the funding of continued loan growth.

Reflective of an increase in loans outstanding and a stable economic forecast, the Company recorded a $6.1 million provision for credit losses during the first quarter of 2024, $2.6 million higher than the first quarter of 2023, as the Company increased credit loss reserves primarily related to the business lending and consumer indirect portfolios.

Asset quality remained strong and below long-term historical averages throughout the first quarter of 2024, although net charge-off, nonperforming and delinquent loan ratios increased in comparison to the first quarter of 2023 levels.

Net charge-offs of $2.8 million remained relatively low at an annualized 0.12% of average loans, but were $1.3 million higher than levels for the first quarter of 2023.

Nonperforming loans as a percentage of total loans increased 12 basis points to 0.50% between the first quarter of 2023 and the first quarter of 2024 primarily driven by the business loans associated with three customers being downgraded from accruing to nonaccrual status.

The 30 to 89 day delinquent loan ratio increased eight basis points versus one year ago to 0.43% primarily due to increases in delinquent balances in the consumer mortgage and consumer indirect loan portfolios.

Banking noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, increased $1.8 million, or 11.1%, as compared to the prior year’s first quarter, reflective of increases in debit interchange and ATM fees and commercial real estate (“CRE”) financing and advisory revenues.

Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, increased $2.9 million, or 5.8%, as compared to the prior year’s first quarter, due to a $2.3 million increase in employee benefit services revenues and a $1.0 million increase in wealth management services revenues, partially offset by a $0.4 million decrease in insurance services revenues.

Noninterest expenses increased $4.0 million, or 3.5%, between the first quarter of 2023 and the first quarter of 2024, primarily due to a $1.6 million increase in salaries and employee benefits, a $1.2 million increase in data processing and communications expenses and a $1.6 million increase in other expenses.

The increase in salaries and employee benefits was primarily driven by merit and market-related increases in employee wages, partially offset by the impact of the previously announced retail customer service workforce reduction plan and a decrease in employee retirement-related severance expense.

The increase in data processing and communications expenses was reflective of continued investment in customer-facing and back-office technologies including investments being made in additional technology to enhance the detection and prevention of customer payment-related fraud and cybersecurity-related incidents.

Other expenses were up due to increases in insurance expenses, including $0.4 million associated with an additional expected increase to the FDIC special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate and a decline in non-service related components of the net periodic pension benefit credit.

The Company’s deposit base and liquidity position continues to be strong, as the Company had total immediately available liquidity sources of $4.60 billion at the end of the first quarter of 2024, more than double its estimated uninsured deposits, net of collateralized and intercompany deposits.

Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of total deposits at the end of the first quarter.

Since the Federal Reserve began raising the federal funds rate in March 2022 in an effort to combat inflation, the cycle-to-date deposit beta (change in the Company’s cost of funds as a proportion of the change in the federal funds rate) for the Company is 20% and the cycle-to-date total funding beta is 23% of the cumulative 525 basis point increase in the federal funds rate, reflective of a comparatively high proportion of non-interest bearing deposits, representing approximately 27% of total ending deposits, and the composition and stability of the customer base.

In addition, more than 65% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the first quarter.

Second quarter 2024 net income decreased $0.4 million, or 0.8%, compared to the second quarter of 2023, while YTD net income increased $34.7 million, or 64.2% compared to the equivalent 2023 timeframe.

Earnings per share of $0.91 for the second quarter of 2024 was $0.02 more than the second quarter of 2023, while 2024 YTD earnings per share of $1.67 was $0.67 higher than 2023 YTD earnings per share.

Although net income decreased slightly between the quarterly periods due to increases in noninterest expenses, the provision for credit losses and income taxes, partially offset by increases in noninterest revenues and net interest income, earnings per share increased between the quarterly periods as the number of fully-diluted shares outstanding decreased reflective of share repurchases between the periods.

The YTD increase in net income and earnings per share was primarily the result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale investment securities during the first quarter of 2023 in connection with a balance sheet repositioning.

In addition, increases in income taxes, noninterest expenses and the provision for credit losses and a decrease in net interest income were partially offset by an increase in noninterest revenues excluding realized investment security losses and a decrease in the number of fully-diluted shares outstanding.

Second quarter and YTD operating net income, a non-GAAP measure, decreased $1.5 million, or 2.9%, as compared to the second quarter of 2023 and decreased $7.4 million, or 7.3%, compared to June YTD 2023.

Second quarter and YTD operating earnings per share, a non-GAAP measure, decreased $0.01 compared to the second quarter of 2023 and decreased $0.11 compared to June YTD 2023.

Second quarter and YTD operating pre-tax, pre-provision net revenue per share, a non-GAAP measure, increased $0.05 compared to the second quarter of 2023 and was consistent with June YTD 2023.

Net interest margin decreased 13 basis points between the second quarter of 2023 and the second quarter of 2024 and decreased 18 basis points on a YTD basis.

Fully tax-equivalent net interest margin, a non-GAAP measure, decreased 14 basis points between the second quarter of 2023 and the second quarter of 2024 and decreased 18 basis points on a YTD basis.

The yield on average interest-earning assets increased 53 basis points compared to the prior year second quarter and 58 basis points compared to the prior YTD period, as the yield on average loans and average investments both improved.

The yield on average loans for the second quarter increased 63 basis points compared to the second quarter of 2023 and 64 basis points between comparable YTD periods.

The increase in yield on average loans was driven by higher interest rates on new loans, an increase in variable and adjustable-rate loan yields reflective of higher market interest rates, including the prime rate, and a high level of new loan originations.

The yield on average investments, including cash equivalents, increased six basis points compared to the prior year’s second quarter and 11 basis points on a YTD basis, reflective of the sales and maturities of certain lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods.

The Company’s total cost of funds increased 70 basis points from last year’s second quarter and 79 basis points YTD, as the rate paid on interest-bearing deposits and the rate paid on borrowings both increased largely due to market-driven increases in deposit and borrowing rates, as well as the higher proportion of funding coming from comparatively higher rate time deposits and external borrowings.

Loan balances increased on both an average and ending basis as compared to the prior year second quarter and YTD period, reflective of continued strong organic loan growth.

Deposit balances also increased on both an average and ending basis as compared to the second quarter of 2023 and YTD due primarily to growth in municipal deposit balances.

Investment balances, including cash equivalents, decreased on both an average and ending basis as compared to the prior year second quarter and YTD period, primarily due to the maturities and sales of certain available-for-sale investment securities between the periods.

Borrowing balances increased on both an average and ending basis compared to the second quarter of 2023 and YTD reflective of the Company securing certain fixed rate Federal Home Loan Bank (“FHLB”) term borrowings between the periods to support the funding of continued loan growth.

Reflective of an increase in loans outstanding and a stable economic forecast, the Company recorded a $2.7 million provision for credit losses during the second quarter and $8.9 million for YTD 2024 resulting in a $2.0 million and $4.6 million higher provision for credit losses than comparable prior year periods, respectively, as the Company increased credit loss reserves primarily related to the business lending and consumer indirect portfolios.

Asset quality remained strong and favorable relative to long-term historical averages during the second quarter and the first six months of 2024.

Net charge-offs were $1.3 million, or an annualized 0.05% of average loans, for the second quarter and $4.1 million, or an annualized 0.08% of average loans, for the first six months of 2024, compared to net charge-offs of $0.7 million, or an annualized 0.03% of average loans, for the prior year’s second quarter and $2.2 million, or an annualized 0.05% of average loans, for the first six months of 2023.

The nonperforming loan ratio of 0.50% at June 30, 2024 increased 14 basis points from June 30, 2023 primarily driven by the business loans associated with four customers being downgraded from accruing to nonaccrual status and remained consistent with one quarter prior.

The 30 to 89 day delinquent loan ratio remained low at 0.45%, down from 0.47% at the end of the second quarter of 2023 and up slightly from 0.43% at the end of the prior quarter.

Banking noninterest revenues, comprised of deposit service fees, mortgage banking and other banking services revenues, increased $1.9 million, or 10.6%, as compared to the prior year’s second quarter, and increased $3.7 million, or 10.9%, between the comparable YTD periods.

The growth between both periods was primarily due to increases in mortgage banking revenues that reflected higher sales volumes of secondary market eligible residential mortgage loans.

Financial services business revenues, comprised of employee benefit services, insurance services and wealth management services revenues, increased $5.8 million, or 12.1%, as compared to the prior year’s second quarter and increased $8.7 million, or 8.9%, compared to the prior YTD period, reflecting revenue growth in all three segments between both periods.

Noninterest expenses increased $6.0 million, or 5.3%, between the second quarter of 2023 and the second quarter of 2024 and increased $10.0 million, or 4.4%, between June YTD 2023 and June YTD 2024.

The increases were primarily driven by salaries and employee benefits that increased $5.4 million, or 8.0%, and $7.0 million, or 5.0%, for the second quarter and YTD periods of 2024, respectively, as compared to the corresponding periods of 2023, reflective of merit and market-related increases in employee wages and acquisitions between the periods, partially offset by the impact of the previously announced retail customer service workforce optimization plan and a decrease in employee retirement-related severance expense.

The remaining net increase in noninterest expenses were mainly due to higher data processing and communications expenses reflective of the Company’s continued investment in customer-facing and back-office technologies including investments in additional technology to enhance its cybersecurity infrastructure combined with an increase in other expenses driven by increases in insurance expenses and a decrease in the net periodic pension benefit credit due to lower non-service related components.

The Company’s deposit base and liquidity position continues to be strong, as the Company had total immediately available liquidity sources of $4.44 billion at the end of the second quarter of 2024, more than double its estimated uninsured deposits, net of collateralized and intercompany deposits.

Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of total deposits at the end of the second quarter.

The Company’s deposit base is well diversified across customer segments, which as of June 30, 2024 was comprised of approximately 61% consumer, 26% business and 13% municipal, and broadly dispersed, illustrated by an average deposit balance per account that was under $20,000.

The lower betas are reflective of a comparatively high proportion of non-interest bearing deposits, representing approximately 28% of total ending second quarter deposits, and the composition and stability of the customer base.

In addition, more than 66% of the Company’s total deposits were in noninterest checking, interest checking and savings accounts at the end of the second quarter.

The Company did not utilize brokered or wholesale deposits.

Net Income and Profitability

As shown in Table 1, net income for the first quarter of $40.9 million increased $35.1 million as compared to the first quarter of 2023.

Earnings per share of $0.76 for the first quarter of 2024 increased $0.65 compared to the first quarter of 2023.

The increase in net income and earnings per share was primarily due to the realized loss on the sales of investment securities that was recognized in the first quarter of 2023, which negatively impacted first quarter 2023 net income by $41.2 million, or $0.75 per share.

Excluding this item, earnings per share decreased $0.10, primarily driven by increases in noninterest expenses, the provision for credit losses and income taxes, and a decrease in net interest income, partially offset by an increase in noninterest revenues and a decrease in the number of fully diluted shares outstanding.

Operating net income, a non-GAAP measure, of $43.8 million for the first quarter decreased $5.9 million, or 11.9%, as compared to the first quarter of 2023.

Operating earnings per share, a non-GAAP measure, of $0.82 for the first quarter was down $0.10 compared to the first quarter of 2023.

As shown in Table 1, net income for the second quarter and June YTD of $47.9 million and $88.8 million, respectively, decreased $0.4 million, or 0.8%, as compared to the second quarter of 2023 and increased $34.7 million, or 64.2%, compared to June YTD 2023.

Earnings per share of $0.91 for the second quarter was $0.02 higher than the second quarter of 2023, while earnings per share for the first six months of 2024 of $1.67 was $0.67 higher than the first six months of 2023.

The decrease in net income for the quarter was the result of increases in noninterest expenses, the provision for credit losses and income taxes, partially offset by increases in net interest income and noninterest revenues, while the increase in earnings per share for the quarter was the result of a decrease in fully diluted shares outstanding, which more than offset the slight decline in net income.

The increase in net income and earnings per share for the YTD period as compared to the prior year was the result of an increase in noninterest revenues, primarily due to the realized loss on the sales of investment securities that was recognized in the first quarter of 2023 as part of a balance sheet repositioning, as well as an increase in all other noninterest revenues and a decrease in fully diluted shares outstanding, partially offset by an increase in noninterest expenses, income taxes and the provision for credit losses, as well as a decrease in net interest income.

Operating net income, a non-GAAP measure, of $50.5 million and $94.3 million for the second quarter and June YTD 2024, respectively, decreased $1.5 million, or 2.9%, as compared to the second quarter of 2023 and decreased $7.4 million, or 7.3%, compared to June YTD 2023.

Operating earnings per share, a non-GAAP measure, of $0.95 for the second quarter was down $0.01 compared to the second quarter of 2023, while operating earnings per share of $1.77 for the first six months of 2024 was down $0.11 compared to the first six months of 2023.

See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

As reflected in Table 1, first quarter net interest income of $107.0 million was down $4.0 million, or 3.6%, from the comparable prior year period.

The decrease was primarily the result of an increase in the cost of interest-bearing liabilities, partially offset by higher yields on interest-earning assets and a higher proportion of those assets being comprised of loan balances due to strong organic loan growth, and the sales and maturities of certain lower-yielding available-for-sale investment securities.

Reflective of an increase in loans outstanding and a stable economic forecast, the provision for credit losses of $6.1 million for the first quarter of 2024 increased $2.6 million as compared to the $3.5 million provision for credit losses in the first quarter of 2023.

The Company increased its qualitative assessment of future uncertainty and built credit loss reserves that were primarily attributable to the business lending and consumer indirect portfolios.

First quarter noninterest revenues were $70.3 million, up $56.8 million from the first quarter of 2023.

The increase was primarily due to the realized loss on sales of available-for-sale investment securities that was recognized in the first quarter of 2023, which negatively impacted first quarter 2023 noninterest revenues by $52.3 million.

Total operating noninterest revenues, a non-GAAP measure, were $70.3 million in the first quarter of 2024, an increase of $4.7 million, or 7.1%, from the prior year’s first quarter.

This increase was driven by a $2.9 million, or 5.8%, increase in financial services business revenues and a $1.8 million, or 11.1%, increase in banking noninterest revenues.

Noninterest expenses of $118.1 million for the first quarter reflected an increase of $4.0 million, or 3.5%, from the first quarter of 2023.

The increase in noninterest expenses for the quarter was primarily due to increases in salaries and employee benefits, data processing and communications expenses, and other expenses.

Income tax expense increased $11.0 million between comparable quarters as pre-tax income increased $46.1 million, due primarily to the previously mentioned realized loss on the sale of certain available-for-sale securities in the first quarter of 2023.

As reflected in Table 1, second quarter net interest income of $109.4 million increased $0.1 million, or 0.1%, from the comparable prior year period.

The quarterly improvement resulted from an increase in the balance of and yield on interest-earning assets, partially offset by an increase in the balance of and rate paid on interest-bearing liabilities.

Net interest income for the first six months of 2024 decreased $3.9 million, or 1.8%, versus the first six months of 2023.

The year-over-year decrease was primarily the result of an increase in the balance and cost of interest-bearing liabilities, partially offset by a higher balance and yield on interest-earning assets due in part to a higher proportion of those assets being comprised of loan balances due to strong organic loan growth, and the sales and maturities of certain lower-yielding available-for-sale investment securities.

Reflective of an increase in loans outstanding and a stable economic forecast, the provision for credit losses of $2.7 million for the second quarter and $8.9 million for June YTD increased $1.9 million and $4.6 million as compared to the second quarter and first six months of 2023, respectively.

During the first six months of 2024, the Company increased its qualitative assessment of future uncertainty and built credit loss reserves that were primarily attributable to the business lending and consumer indirect portfolios.

Second quarter and year-to-date noninterest revenues were $74.4 million and $144.7 million, respectively, up $8.4 million, or 12.7%, from the second quarter of 2023 and up $65.2 million, or 82.0%, from the first six months of 2023.

Total operating noninterest revenues, a non-GAAP measure, for the second quarter and June YTD were $73.8 million and $144.0 million, respectively, an increase of $7.7 million, or 11.7%, and $12.4 million, or 9.4%, from the prior second quarter and YTD period, respectively.

The increase over the prior year second quarter was driven by a $5.8 million, or 12.1%, increase in financial services business revenues and a $1.9 million, or 10.6%, increase in banking noninterest revenues.

The increase over the prior June YTD period was driven by an $8.7 million, or 8.9%, increase in financial services business revenues and a $3.7 million, or 10.9%, increase in banking noninterest revenues.

Noninterest expenses of $119.0 million and $237.1 million for the second quarter and June YTD periods, respectively, reflected an increase of $6.0 million, or 5.3%, from the second quarter of 2023 and an increase of $10.0 million, or 4.4%, from the first six months of 2023.

The increase in noninterest expenses for the second quarter and June YTD periods was primarily due to increases in salaries and employee benefits, data processing and communications and other expenses.

Operating noninterest expenses increased $6.7 million, or 6.2%, from the prior year second quarter, and $10.7 million, or 4.9%, from the prior June YTD.

The effective income tax rates were 22.8% and 22.9% for second quarter and YTD 2024, respectively, as compared to 21.4% and 21.0% for the comparable prior year periods, primarily due to a higher full year projected pre-tax income result and a higher proportion of income from taxable sources.

A condensed income statement is as follows:

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Three Months Ended

Six Months Ended

(000’s omitted, except per share data)

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Net interest margin is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities as a percentage of interest-earning assets.

Net interest income totaled $107.0 million for the first quarter of 2024 compared to $111.0 million for the first quarter of 2023.

As shown in Table 2, fully tax-equivalent net interest income, a non-GAAP measure, for the first quarter was $108.0 million, a $4.1 million, or 3.7%, decrease from the same period last year.

The decrease resulted from a 115 basis point increase in the rate paid on average interest-bearing liabilities and a $755.3 million increase in average interest-bearing liability balances, partially offset by a $374.0 million increase in average interest-earnings asset balances and a 61 basis point increase in the yield on average interest-earning assets in comparison to the first quarter of 2023.

As reflected in Table 3, the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $29.5 million and the volume increase in average interest-bearing liability balances of $1.3 million were partially offset by the favorable impacts of the volume increase in average interest-earning asset balances of $3.4 million and the increase in the yield on average interest-earning assets of $23.3 million.

The net interest margin of 2.95% and fully tax-equivalent net interest margin of 2.98%, a non-GAAP measure, for the first quarter of 2024 both decreased 22 basis points from the first quarter of 2023 driven by the increase in the rate paid on average interest-bearing liabilities, partially offset by the increase in the yield on average interest-earnings assets and a higher proportion of those assets being comprised of loan balances due to strong organic loan growth and the sales and maturities of certain lower-yielding available-for-sale investment securities between the periods.

The higher yield on average interest-earning assets for the quarter was the result of increases in both the yield on average loans and the yield on average investments, including cash equivalents.

The yield on average loans for the first quarter increased by 66 basis points compared to the first quarter of 2023, reflective of market-related increases in interest rates on new loans, an increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and a high level of new loan originations.

The first quarter of 2024 yield on average investments, including cash equivalents, increased 16 basis points compared to the prior year, as market interest rates increased and the proportion of higher-yielding cash equivalents increased.

The current quarter’s yield on average investments, excluding cash equivalents, increased one basis point as the majority of the Company’s investment portfolio is comprised of fixed yield securities, while the yield on average cash equivalents increased 190 basis points compared to the first quarter of 2023.

The average book balance of investments in the first quarter, including cash equivalents, decreased $530.5 million, or 10.0%, as compared to the corresponding prior year period due to a $733.0 million, or 13.9%, decrease in average investment balances, reflective of sales and maturities of certain available-for-sale investment securities, partially offset by a $202.5 million increase in average cash equivalents.

Investment purchases outpaced sales, maturities, calls and principal payments during the first quarter of 2024 driven by $38.4 million of government agency mortgage-backed securities purchases classified as held-to-maturity.

Average loan balances were $904.5 million, or 10.2%, greater than the prior year’s first quarter balances with increases in all five major loan portfolios due to high levels of organic growth.

The first quarter of 2024 rate on average interest-bearing liabilities increased 115 basis points compared to the prior year first quarter reflective of a 111 basis point increase in the rate paid on average interest-bearing deposits and a 103 basis point increase in the rate paid on average borrowings.

The increase in the rate paid on average interest-bearing deposits was due to interest rates on certain interest-bearing deposits being raised in response to market conditions, including the effects of a 100 basis point increase in the Federal Funds rate during 2023 as a result of the Federal Reserve Bank’s efforts to lower elevated inflation, and a shift in deposit mix as customers responded to changes in market interest rates by moving funds into higher yielding account types.

Average interest-bearing deposits increased $536.5 million between the first quarter of 2023 and the first quarter of 2024 with increases in time and money market deposits, partially offset by decreases in savings and interest checking deposits primarily driven by net public fund inflows and the aforementioned shift in deposit mix.

The Company continues to be proactive in managing customer relationships with depositors, particularly larger consumer, commercial and municipal customers.

The average borrowing balance, including borrowings at the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), the Federal Reserve Bank of New York (“Federal Reserve”), securities sold under agreement to repurchase (customer repurchase agreements) and subordinated notes payable, increased $218.8 million compared to the prior year quarter due to a $381.8 million increase in average term FHLB borrowings and a $217.6 million increase in average Federal Reserve Bank Term Funding Program borrowings to meet the Company’s funding needs, partially offset by a $333.0 million decrease in average overnight borrowings, a $44.5 million decrease in average customer repurchase agreements and a $3.1 million decrease in average subordinated notes payable.

At the end of the first quarter, the Company was not in an overnight borrowing position and did not hold any outstanding borrowings from the Federal Reserve’s Bank Term Funding Program.

Table 2 below sets forth information related to average interest-earning assets and average interest-bearing liabilities and their associated yields and rates for the periods indicated.

Net interest income totaled $109.4 million for the second quarter of 2024 compared to $109.3 million for the second quarter of 2023.

As shown in Table 2a, fully tax-equivalent net interest income, a non-GAAP measure, for the second quarter was $110.4 million, consistent with the same period last year.

This was driven by a 53 basis point increase in the yield on average interest-earning assets and a $664.3 million increase in average interest-earning asset balances, offset by an 89 basis point increase in the rate paid on average interest-bearing liabilities and an $888.5 million increase in average interest-bearing liability balances in comparison to the second quarter of 2023.

As reflected in Table 3 for the quarter, the favorable net interest income impacts of the increase in the yield on average interest-earning assets of $18.7 million and the volume increase in average interest-earning asset balances of $6.5 million were offset by the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $23.0 million and the volume increase in average interest-bearing liability balances of $2.3 million.

Net interest income totaled $216.4 million for the first six months of 2024 compared to $220.3 million for the first six months of 2023.

As reflected in Table 2b, June YTD fully tax-equivalent net interest income, a non-GAAP measure, of $218.4 million, decreased $4.1 million, or 1.8%, from the year-earlier period.

The June YTD decrease resulted from a 102 basis point increase in the rate paid on average interest-bearing liabilities and an $822.1 million increase in average interest-bearing liability balances, partially offset by a $519.9 million increase in average interest-earning asset balances and a 58 basis point increase in the yield on average interest-earning assets.

As reflected in Table 3 for June YTD, the unfavorable net interest income impacts of the increase in the rate paid on average interest-bearing liabilities of $52.5 million and the volume increase in average interest-bearing liability balances of $3.6 million were partially offset by the favorable impacts of the volume increase in average interest-earning asset balances of $9.9 million and the increase in the yield on average interest-earning assets of $42.1 million.

Net interest margin of 3.01% for the second quarter of 2024 was 13 basis points lower as compared to the second quarter of 2023.

The fully tax-equivalent net interest margin, a non-GAAP measure, of 3.04% for the second quarter of 2024 was 14 basis points lower as compared to the prior year’s second quarter.

Net interest margin of 2.98% and fully tax-equivalent net interest margin, a non-GAAP measure, of 3.01% for the first six months of 2024 were both 18 basis points lower than the comparable period of 2023.

The decreases were the result of the increase in the rate paid on average interest-bearing liabilities, partially offset by the increase in the yield on average interest-earnings assets and a higher proportion of those assets being comprised of loan balances due to strong organic loan growth and the sales and maturities of certain lower-yielding available-for-sale investment securities between the periods.

The decline in noninterest checking deposit balances combined with an increase in time deposit balances also had an adverse impact on the net interest margin and fully tax-equivalent net interest margin, a non-GAAP measure, between both periods.

The 53 basis point increase in the average yield on interest-earning assets for the quarter was the result of increases in both the yield on average loans and the yield on average investments, including cash equivalents.

The yield on average loans for the second quarter increased by 63 basis points compared to the second quarter of 2023.

The second quarter of 2024 yield on average investments, including cash equivalents, increased six basis points compared to the prior year while the yield on average investments, excluding cash equivalents, increased four basis points for the same timeframe.

The 58 basis point increase in the yield on interest-earning assets for the first six months of 2024 was the result of a 64 basis point increase in the yield on average loans and an 11 basis point increase in the yield on average investments, including cash equivalents, compared to the prior YTD period.

Excluding cash equivalents, the yield on average investments increased two basis points compared to the prior YTD period.

The increase in loan yields were reflective of higher interest rates on new loans, an increase in variable and adjustable-rate loan yields driven by higher market interest rates, including the prime rate, and a high level of new loan originations.

As the majority of the Company’s investment portfolio, excluding cash equivalents, is comprised of fixed yield securities, the increase in investment yields were driven by the sales and maturities of certain lower-yielding available-for-sale investment securities and the purchases of certain higher-yielding government agency mortgage-backed securities between the periods.

The second quarter and YTD average book balance of investments, including cash equivalents, decreased $232.2 million and $380.1 million, respectively, as compared to the corresponding prior year periods, primarily due to declines in the investment securities portfolio driven by scheduled maturities and the sales of certain available-for-sale investment securities combined with cashflows being redeployed into loan originations.

Investment purchases outpaced sales, maturities, calls and principal payments during the second quarter and YTD periods, driven by $85.9 million of YTD government agency mortgage-backed securities purchases classified as held-to-maturity.

The cash equivalents component of average interest-earning assets increased $20.4 million and $111.5 million for the second quarter and YTD periods, respectively, compared to the prior year periods.

Average loan balances increased $896.5 million for the quarter and $900.0 million YTD as compared to the prior year, with increases in all five major loan portfolios between both periods due to high levels of organic growth.

The rate paid on average interest-bearing liabilities increased by 89 basis points compared to the prior year quarter as the average rate paid on interest-bearing deposits increased 84 basis points and the average rate paid on external borrowings increased 111 basis points from the comparable prior period.

For the first six months of 2024, the rate paid on average interest-bearing liabilities increased by 102 basis points from the comparable prior year period as the rate paid on average interest-bearing deposits increased 97 basis points and the rate paid on average external borrowings increased 105 basis points.

The increase in the rate paid on average interest-bearing deposits was due to interest rates on certain interest-bearing deposits being raised in response to market conditions, including the effects of a 100 basis point increase in the Federal Funds rate during 2023 as a result of the Federal Reserve Bank’s (“Federal Reserve” or “FRB”) efforts to lower elevated inflation, and a shift in deposit mix as customers responded to changes in market interest rates by moving funds into higher yielding account types.

The increase in the rate paid on average borrowings was primarily the result of higher market interest rates between the periods and the Company securing $400.0 million of fixed rate FHLB term borrowings in the third and fourth quarters of 2023 and $150.0 million of additional fixed rate FHLB term borrowings in the second quarter of 2024 to help meet the Company’s funding needs including the funding of the Company’s strong loan growth.

Average interest-bearing deposits increased $626.1 million compared to the prior year quarter and $581.0 million compared to the prior YTD period.

The quarterly and YTD increases in average interest-bearing deposits were due to increases in time and money market deposits, partially offset by decreases in savings and interest checking deposits reflective of the aforementioned shift in deposit mix and net municipal inflows.

The average borrowing balance, which primarily includes borrowings at the FHLB and securities sold under agreement to repurchase (customer repurchase agreements), increased $262.4 million and $241.1 million for the quarter and YTD periods, respectively.

The increase in average borrowings from the prior year quarter and YTD periods was primarily due to the aforementioned increase in FHLB term borrowings to meet the Company’s funding needs.

Tables 2a and 2b below sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the periods indicated.

Interest income and yields are on a fully tax-equivalent (“FTE”) basis using a marginal income tax rate of 24.4% in 2024 and 24.3% in 2023.

Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period.

Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment, late and other fees and the accretion of acquired loan marks.

Loan interest income and yields include amortization of deferred loan income and costs, loan prepayment, late and other fees and the accretion of acquired loan purchase discounts and premiums.

Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.

2 unchanged sentences

Three Months Ended

March 31, 2024

March 31, 2023

June 30, 2024

June 30, 2023

(000’s omitted except yields and rates)

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Overnight borrowings

FHLB borrowings

FHLB and other borrowings

Total interest-bearing liabilities

Noninterest-bearing liabilities:

Noninterest checking deposits

Other liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest earnings

Net interest spread

Net interest margin on interest-earning assets

Net interest margin on interest-earning assets (FTE) (non-GAAP)

Fully tax-equivalent adjustment (3)

(1) Averages for investment securities are based on amortized cost basis and the yields do not give effect to changes in fair value that is reflected as a component of noninterest-earning assets, shareholders’ equity, and deferred taxes.

(2) Includes nonaccrual loans.

The impact of interest and fees not recognized on nonaccrual loans was immaterial.

(3) The FTE adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable.

The adjustment enhances the comparability of the performance of assets that have different tax liabilities.

Year-to-Date Average Balance Sheet

Six Months Ended

June 30, 2024

June 30, 2023

(000’s omitted except yields and rates)

Interest-earning assets:

Cash equivalents

Taxable investment securities (1)

Nontaxable investment securities (1)

Loans (net of unearned discount) (2)

Total interest-earning assets

Noninterest-earning assets

Interest-bearing liabilities:

Interest checking, savings, and money market deposits

Time deposits

Customer repurchase agreements

Overnight borrowings

FHLB and other borrowings

Federal Reserve short-term borrowings

14 unchanged sentences

The impact of interest and fees not recognized on nonaccrual loans was immaterial.

(3) The fully-tax equivalent adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable.

The adjustment attempts to enhance the comparability of the performance of assets that have different tax liabilities.

(3) The FTE adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable.

The adjustment enhances the comparability of the performance of assets that have different tax liabilities.

As discussed above and disclosed in Table 3 below, the change in net interest income (FTE basis) may be analyzed by segregating the volume and rate components of the changes in interest income and interest expense for each underlying category.

Three months ended March 31, 2024

versus March 31, 2023

Three months ended June 30, 2024

Six months ended June 30, 2024

versus June 30, 2023

Increase (Decrease) Due to Change in (1)

(000’s omitted)

29 unchanged sentences

Three Months Ended

Six Months Ended

(000’s omitted)

8 unchanged sentences

Gain on debt extinguishment

Unrealized gain on equity securities

Unrealized gain (loss) on equity securities

Total noninterest revenues

1 unchanged sentence

Operating noninterest revenues/operating revenues (FTE basis) (non-GAAP) (1)

(1) Operating noninterest revenues, a non-GAAP measure, excludes loss on sales of investment securities, gain on debt extinguishment and unrealized gain on equity securities from total noninterest revenues.

Operating revenues, a non-GAAP measure, is defined as net interest income on a fully tax-equivalent basis plus noninterest revenues, excluding loss on sales of investment securities, gain on debt extinguishment, and unrealized gain on equity securities.

(1) Operating noninterest revenues, a non-GAAP measure, excludes loss on sales of investment securities, gain on debt extinguishment and unrealized gain (loss) on equity securities from total noninterest revenues.

See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

As displayed in Table 4, noninterest revenues were $70.3 million in the first quarter of 2024.

This represents an increase of $56.8 million for the quarter in comparison to the same 2023 timeframe which was primarily a result of a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities in connection with a strategic balance sheet repositioning executed during the prior year’s first quarter.

Operating noninterest revenues, a non-GAAP measure that excludes loss on sales of investment securities, gain on debt extinguishment and unrealized gain on equity securities from total noninterest revenues, were $70.3 million in the first quarter, an increase of $4.7 million, or 7.1%, from the same quarter last year.

The increase in operating noninterest revenues, a non-GAAP measure, was driven by increases in employee benefit services revenues, banking noninterest revenues and wealth management services revenues, partially offset by a decrease in insurance services revenues.

Employee benefit services revenues increased $2.3 million, or 7.9%, as compared to the prior year first quarter primarily related to a year-over-year increase in the total participants under administration, along with growth in asset-based fee revenues resulting from market appreciation and the acquisition of certain assets of Creative Plan Designs Limited, a provider of employee benefit plan design, administration and consulting, on February 1, 2024.

Wealth management services revenues increased $1.0 million, or 11.7%, as compared to the prior year first quarter as more favorable investment market conditions drove an increase in assets under management between the periods.

Insurance services revenues decreased $0.4 million, or 3.6%, for the first quarter of 2024 as compared to the first quarter of 2023, reflective of timing differences in certain commercial policy renewals and lower insurance carrier-related contingency revenues.

Banking noninterest revenues of $18.2 million for the first quarter of 2024 increased $1.8 million, or 11.1% as compared to the corresponding prior year period.

The year-over-year increase was driven by increases in debit interchange and ATM fees ($0.7 million, or 12.0%), reflective of fluctuations in annual card-related promotional income and a higher level of debit card transaction activity, deposit service charges and fees ($0.6 million, or 9.2%), other banking revenues ($0.4 million, or 12.2%), including a $0.5 million increase in CRE financing and advisory revenues associated with the Axiom acquisition and mortgage banking revenues ($0.1 million, or 25.5%).

The Company expects continued growth in its other banking revenues associated with interest rate swap fee revenues due to its recent implementation of interest rate swap origination capabilities.

The ratio of noninterest revenues to total revenues was 39.6% for the first quarter of 2024, compared to 10.8% for the prior year’s first quarter.

The increase was primarily the result of the $56.8 million increase in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities recognized in the prior year’s first quarter, while net interest income decreased 3.6%, driven by funding cost pressures.

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 39.4% for the quarter ended March 31, 2024 versus 36.9% for the equivalent period of 2023.

The increase was driven by a 7.1% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, decreased 3.7%, driven by funding cost pressures.

As displayed in Table 4, noninterest revenues totaled $74.4 million for the second quarter of 2024 and $144.7 million for the first six months of 2024.

This represents an increase of $8.4 million, or 12.7%, for the quarter and an increase of $65.2 million, or 82.0%, for the YTD period in comparison to the equivalent 2023 periods.

Noninterest revenues for the second quarter and YTD periods of 2024 included a $0.9 million unrealized gain on equity securities associated with the conversion of certain Visa Class B shares to Visa Class C shares and a $0.2 million loss on sales of investment securities associated with the sales of certain available-for-sale investment securities.

Noninterest revenues for the first six months of 2023 included a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities in connection with a strategic balance sheet repositioning executed during the prior year’s first quarter and a $0.2 million gain on debt extinguishment.

Operating noninterest revenues, a non-GAAP measure as defined in the table above, totaled $73.8 million for the second quarter of 2024, an increase of $7.7 million, or 11.7%, from the prior year’s second quarter and totaled $144.0 million for the first six months of 2024, an increase of $12.4 million, or 9.4%, from the first six months of 2023.

The increases between both periods reflected growth in employee benefit services revenues, banking noninterest revenues, insurance services revenues and wealth management services revenues.

Employee benefit services revenues increased $3.5 million, or 12.4%, and $5.9 million, or 10.1%, for the three and six months ended June 30, 2024, respectively, as compared to the equivalent prior year periods driven by new business and increases in the total participants under administration, along with growth in asset-based fee revenues resulting from market appreciation and the acquisition of certain assets of Creative Plan Designs Limited, a provider of employee benefit plan design, administration and consulting, on February 1, 2024.

Banking noninterest revenues increased $1.9 million, or 10.6%, between the second quarter of 2023 and 2024 and increased $3.7 million, or 10.9%, between the first six months of 2023 and 2024.

The growth between both periods was driven by increases in mortgage banking revenues (up $2.3 million for the quarter and YTD), deposit service charges and fees (up $0.4 million for the quarter and $1.1 million YTD) and debit interchange and ATM fees (up $0.1 million for the quarter and $0.8 million YTD), partially offset by a decrease in other banking revenues (down $0.9 million for the quarter and $0.5 million YTD).

The increases in mortgage banking revenues reflected higher sales volumes of secondary market eligible residential mortgage loans and an increase in the value of mortgage servicing rights.

The Company expects growth in its other banking revenues associated with interest rate swap fee revenues due to its recent implementation of interest rate swap origination capabilities.

Insurance services revenues increased $1.4 million, or 12.2%, and $1.0 million, or 4.4%, for the second quarter and YTD periods, respectively, due to organic and acquired growth in commissions revenues, including the incremental revenues resulting from the acquisition of a New York-based insurance agency for $4.6 million in total consideration on April 1, 2024.

Wealth management services revenues increased $0.8 million, or 10.6%, for the second quarter of 2024 and $1.8 million, or 11.2%, for June 2024 YTD as compared to the same time periods of 2023, as more favorable investment market conditions drove an increase in assets under management between the periods.

The ratio of noninterest revenues to total revenues was 40.5% for the second quarter of 2024 and 40.1% for June YTD 2024, compared to 37.6% for the prior year’s second quarter and 26.5% for June YTD 2023.

The quarterly increase was due to noninterest revenues increasing 12.7% while net interest income increased 0.1%.

The YTD increase was primarily the result of the $65.2 million, or 82.0%, increase in total noninterest revenues due to the aforementioned $52.3 million realized loss on sales of investment securities recognized in the prior year’s first quarter, while net interest income decreased 1.8% driven by funding cost pressures.

The ratio of operating noninterest revenues to operating revenues (FTE), a non-GAAP measure as defined in the table above, was 40.1% for the quarter and 39.7% for the six months ended June 30, 2024, respectively, versus 37.4% and 37.2% for the comparable periods of 2023.

The increase between the quarterly periods was due to an 11.7% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, was flat.

The year-to-date increase was a function of a 9.4% increase in operating noninterest revenues, a non-GAAP measure, due to the factors noted above, while fully tax-equivalent net interest income, a non-GAAP measure, decreased 1.8%, driven by funding cost pressures.

Noninterest Expenses

Table 5 below sets forth the quarterly results of the major noninterest expense categories for the current and prior year, as well as efficiency ratios (defined below), a standard measure of expense utilization effectiveness commonly used in the banking industry.

Table 5 below sets forth the quarterly and YTD results of the major noninterest expense categories for the current and prior year, as well as efficiency ratios (defined below), a standard measure of expense utilization effectiveness commonly used in the banking industry.

Noninterest Expenses

Three Months Ended

Six Months Ended

(000’s omitted)

7 unchanged sentences

Acquisition expenses

Acquisition-related contingent consideration adjustment

Total noninterest expenses

3 unchanged sentences

Operating efficiency ratio (non-GAAP) (2)

(1) Operating expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses, litigation accrual and amortization of intangibles.

(1) Operating noninterest expenses, a non-GAAP measure, is calculated as total noninterest expenses less acquisition expenses, acquisition-related contingent consideration adjustments, litigation accrual and amortization of intangibles.

See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

(2) Operating efficiency ratio, a non-GAAP measure, is calculated as operating expenses as defined in footnote (1) above divided by net interest income on a fully tax-equivalent basis plus noninterest revenues excluding loss on sales of investment securities, gain on debt extinguishment and unrealized gain on equity securities.

See Table 14 for Reconciliation of GAAP to Non-GAAP Measures.

As shown in Table 5, the Company recorded noninterest expenses of $118.1 million for the first quarter of 2024, representing an increase of $4.0 million, or 3.5%, from the prior year’s first quarter.

The increase in noninterest expenses was attributable to a $1.6 million, or 2.2%, increase in salaries and employee benefits, a $1.6 million, or 24.4%, increase in other expenses, a $1.2 million, or 9.3%, increase in data processing and communications expenses, a $0.3 million, or 3.1%, increase in occupancy and equipment expenses, a $0.1 million, or 5.0%, increase in business development and marketing and a $0.1 million increase in litigation accrual.

The increases in these noninterest expenses were partially offset by a $0.8 million, or 16.5%, decrease in legal and professional fees and a $0.1 million, or 2.5%, decrease in the amortization of intangible assets.

Operating expenses, a non-GAAP measure, increased $4.0 million, or 3.6%, between the comparable quarters.

The increase in salaries and benefits expense was driven by merit and market-related increases in employee wages, partially offset by the impact of the previously announced retail customer service workforce optimization plan and a decrease in employee retirement-related severance expense.

Other expenses were up primarily due to increases in insurance expenses and non-service related components lowering the net periodic pension benefit credit.

The increase in insurance expenses included $0.4 million associated with an additional expected increase to the FDIC special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate.

The increase in data processing and communications expenses is reflective of the Company’s continued investment in customer-facing and back-office technologies including investments being made in additional system resources to enhance the detection and prevention of customer payment-related fraud and cybersecurity-related incidents.

The Company’s GAAP efficiency ratio was 66.6% for the first quarter of 2024, 25.0 percentage points favorable to the comparable quarter of 2023.

This resulted from total revenues increasing 42.4%, primarily due to a $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the prior year quarter, while total noninterest expenses increased 3.5% due to the factors noted above.

Annualized current quarter noninterest expenses as a percentage of average assets were consistent with the first quarter of the prior year as noninterest expenses increased 3.5% due to the factors noted above and average assets increased 2.8% primarily due to the aforementioned organic loan growth.

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 64.1% for the first quarter of 2024, 2.0 percentage points unfavorable to the comparable quarter of 2023.

This resulted from operating noninterest expenses, a non-GAAP measure as described above, increasing 3.6%, while operating revenues (FTE), a non-GAAP measure as described above, increased by a lesser 0.3%.

Current year operating noninterest expenses, a non-GAAP measure as described above, as a percentage of average assets were consistent with the prior year first quarter.

First quarter operating noninterest expenses, a non-GAAP measure as defined above, increased 3.6% year-over-year, while average assets increased 2.8% primarily due to the aforementioned organic loan growth.

The first quarter 2024 effective income tax rate was 22.9%, compared to 16.9% for the first quarter of 2023.

The increase in the effective income tax rate was primarily attributable to a higher proportion of benefit derived from stock based compensation activity in relation to total income taxes during the first quarter of 2023 as total income taxes in the prior year’s first quarter were significantly lower driven by a $52.3 million realized loss on sales of investment securities.

The Company recorded $0.2 million of tax expense associated with stock-based compensation in the first quarter of 2024 and a $0.3 million tax benefit associated with stock-based compensation in the first quarter of 2023, while total income tax expense was $12.2 million and $1.2 million for the same respective periods.

The effective tax rates excluding the stock-based compensation tax benefits and federal tax credit amortization were 22.0% for the first quarter of 2024 and 21.4% for the first quarter of 2023, an increase of 0.6 percentage points primarily due to an increase in the full-year 2024 pre-tax income projection as compared to the prior year.

The carrying value of investment securities (including unrealized gains and losses on available-for-sale securities) was $4.15 billion at the end of the first quarter, a decrease of $13.2 million, or 0.3%, from December 31, 2023 and $478.6 million, or 10.3%, lower than March 31, 2023.

The book value (excluding unrealized gains and losses) of investment securities increased $28.8 million from December 31, 2023, driven by government agency mortgage-backed securities purchases, and decreased $440.9 million from March 31, 2023 due to the maturities of certain lower-yielding available-for-sale investment securities in the prior year.

During the first quarter of 2024, the Company purchased $38.4 million of government agency mortgage-backed securities with an average yield of 5.71%, which the Company classified as held-to-maturity.

These additions were offset by $16.7 million from investment maturities, calls, and principal payments during the first three months of 2024.

Additionally, there was $9.4 million of net accretion on investment securities during the first quarter of 2024.

The effective duration of the investment securities portfolio was 6.8 years at the end of the first quarter of 2024, as compared to 7.0 years at the end of 2023 and 6.8 years at the end of the first quarter of 2023.

As shown in Table 5, the Company recorded noninterest expenses of $119.0 million and $237.1 million for the second quarter and YTD periods of 2024, respectively, representing an increase of $6.0 million, or 5.3%, and an increase of $10.0 million, or 4.4%, from the prior year periods, respectively.

The remaining change to noninterest expenses is attributable to data processing and communications (up $1.0 million for the quarter and $2.2 million YTD), amortization of intangible assets (up $0.2 million for the quarter and $0.1 million YTD), occupancy and equipment (up $0.3 million for the quarter and $0.6 million YTD), legal and professional fees (up $0.3 million for the quarter and down $0.5 million YTD), business development and marketing (down $0.4 million for the quarter and $0.3 million YTD), acquisition-related contingent consideration adjustments (down $1.0 million for the quarter and YTD), acquisition expenses (up $0.1 million for the quarter and YTD), litigation accrual (up $0.1 million YTD) and other expenses (up $0.1 million for the quarter and $1.7 million YTD).

The increases in salaries and benefits expense were driven by merit and market-related increases in employee wages and acquisitions between the periods, partially offset by the impact of the previously announced retail customer service workforce optimization plan and a decrease in employee retirement-related severance expense.

The increases in data processing and communications expenses are reflective of the Company’s continued investment in customer-facing and back-office technologies including investments in additional technology to enhance its cybersecurity infrastructure, including the detection and prevention of customer payment-related fraud.

The increase in other expenses on a YTD basis was primarily due to increases in insurance expenses and non-service related components lowering the net periodic pension benefit credit.

The increase in insurance expenses included $0.3 million associated with an additional expected increase to the Federal Deposit Insurance Corporation (“FDIC”) special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closures of certain banks in the first quarter of 2023, along with the impact of a higher FDIC insurance assessment rate.

The Company’s GAAP efficiency ratio was 64.7% for the second quarter of 2024, 0.2 percentage points unfavorable to the comparable quarter of 2023.

This resulted from total revenues increasing 4.9%, primarily due to higher noninterest revenues, while total noninterest expenses increased 5.3% due to the factors noted above.

The GAAP efficiency ratio of 65.7% for June YTD 2024 was 10.1 percentage points favorable to the 75.8% GAAP efficiency ratio for June YTD 2023.

The improvement in the GAAP efficiency ratio between the comparable YTD periods was the result of total revenues increasing 20.4% primarily due to the $52.3 million pre-tax realized loss on the sale of certain available-for-sale securities during the first quarter of 2023, while total noninterest expenses increased 4.4% due to the factors noted above.

Annualized current quarter noninterest expenses as a percentage of average assets increased 0.04 percentage points versus the second quarter of the prior year as noninterest expenses increased 5.3% while average assets increased 4.2%.

On a YTD basis, annualized noninterest expenses as a percentage of average assets increased 0.02 percentage points as noninterest expenses increased 4.4% while average assets increased 3.5%.

Noninterest expenses increased between both periods due to the factors noted above and average assets increased between both periods primarily due to the aforementioned organic loan growth.

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, was 62.5% for the second quarter, 1.1 percentage points unfavorable to the comparable quarter of 2023.

This resulted from operating noninterest expenses, a non-GAAP measure as described above, increasing 6.2%, while operating revenues (FTE), a non-GAAP measure as described above, increased 4.4%.

The Company’s operating efficiency ratio, a non-GAAP measure as defined in the table above, of 63.3% for the first six months of 2024 was 1.5 percentage points unfavorable compared to the first six months of 2023 due to 4.9% higher operating noninterest expenses, a non-GAAP measure as described above, while operating revenues (FTE), a non-GAAP measure as described above, increased by 2.3%.

Annualized current year operating noninterest expenses, a non-GAAP measure as described above, as a percentage of average assets increased 0.06 percentage points versus the prior year quarter and increased 0.03 percentage points versus the prior year-to-date period as operating noninterest expenses, a non-GAAP measure as described above, increased at a higher rate than average assets on both a quarterly and YTD basis.

Operating noninterest expenses, a non-GAAP measure as described above, increased 6.2% for the quarter and 4.9% for the year-to-date period, while average assets increased 4.2% for the quarter and 3.5% for the year-to-date period.

The second quarter and YTD 2024 effective income tax rates were 22.8% and 22.9%, respectively, as compared to 21.4% and 21.0% for the comparable periods of 2023.

The increase in the second quarter and YTD 2024 effective income tax rates are primarily attributable to an increase in the full-year 2024 pre-tax income projection as compared to the prior year, as the prior YTD included a $52.3 million realized loss on sales of investment securities.

The Company recorded a $0.2 million income tax expense and a $0.3 million income tax benefit associated with stock-based compensation for YTD 2024 and YTD 2023, respectively.

The effective tax rates adjusted to exclude stock-based compensation tax benefits and federal tax credit amortization for the second quarter and YTD 2024 were 22.3% and 22.1%, respectively, as compared to 21.4% for both of the comparable periods of 2023.

Investment Securities

The carrying value of investment securities (including unrealized gains and losses) was $4.17 billion at the end of the second quarter, an increase of $1.3 million from December 31, 2023 and a decrease of $65.3 million, or 1.5%, from June 30, 2023.

The book value of investment securities (excluding unrealized gains and losses) of $4.60 billion at the end of the second quarter increased $51.4 million from December 31, 2023 and decreased $69.4 million from June 30, 2023.

During the first six months of 2024, the Company purchased $85.9 million of government agency mortgage-backed securities with an average yield of 5.65%, which the Company classified as held-to-maturity.

The Company also participated in a Visa Class B share exchange during the second quarter of 2024, in which half of its Visa Class B shares were converted into Visa Class C shares that are convertible (with certain timing restrictions) to NYSE-traded Visa Class A shares, resulting in a $0.9 million unrealized gain on equity securities.

These additions were offset by proceeds of $31.0 million from sales of tax-exempt obligations of state and political subdivisions available-for-sale investment securities and $34.6 million of investment maturities, calls and principal payments during the first six months of 2024.

A realized loss of $0.2 million was recognized on the sales of tax-exempt obligations of state and political subdivisions available-for-sale investment securities during the second quarter of 2024.

Additionally, there was $18.9 million of net accretion on investment securities during the first six months of 2024.

The effective duration of the investment securities portfolio was 6.6 years at the end of the second quarter of 2024, as compared to 7.0 years at the end of 2023 and 7.2 years at the end of the second quarter of 2023.

The change in the carrying value of investment securities is also impacted by the amount of net unrealized gains or losses.

At March 31, 2024, the investment portfolio (excluding held-to-maturity investment securities) had a $422.7 million net unrealized loss, a $42.0 million increase from the $380.7 million net unrealized loss at December 31, 2023 and a $37.7 million increase from the $385.0 million net unrealized loss at March 31, 2023.

These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities purchases and maturities that have occurred over the past 12 months.

The following table sets forth the carrying value for the Company’s investment securities portfolio:

At June 30, 2024, the investment portfolio (excluding held-to-maturity investment securities) had a $430.9 million net unrealized loss, as compared to a $380.7 million net unrealized loss at December 31, 2023 and a $435.0 million net unrealized loss at June 30, 2023.

These changes in the net unrealized position of the portfolio were principally driven by the movements in medium to long-term interest rates, as well as the volume and rates associated with the securities sales and maturities that have occurred over the past 12 months.

The following table sets forth the carrying value of the Company’s investment securities portfolio:

Investment Securities

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Total investments

Loans ended the first quarter at $9.88 billion, $178.9 million, or 1.8%, higher than December 31, 2023 ending loans and $901.2 million, or 10.0%, higher than March 31, 2023.

The combined total of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and vehicle dealer floor plan financing is characterized as the Company’s business lending activity.

The business lending portfolio increased $472.3 million, or 12.6%, from March 31, 2023, and $135.8 million, or 3.3%, from December 31, 2023, driven by net organic growth over both periods.

Non-owner occupied commercial real estate increased $38.7 million, or 2.3%, multifamily increased $38.5 million, or 6.2%, business non-real estate loans, including commercial and industrial lending, increased $34.1 million, or 3.4%, and owner-occupied commercial real estate increased $24.5 million, or 3.3%, as compared to December 31, 2023.

While certain macroeconomic concerns have emerged related to non-owner occupied and multifamily commercial real estate, the Company’s exposure to this portfolio is diverse both geographically and by industry type, and remains relatively low at 15% of total assets, 25% of total loans and 201% of total bank-level regulatory capital.

Commercial real estate lending represents 75.5% of the total business lending portfolio at March 31, 2024 while other commercial and industrial lending represents the remaining 24.5% of total business lending.

The Company’s largest non-owner occupied commercial real estate lending concentration by property type is multifamily at 20.6% of total business lending, followed by office and commercial construction, at 11.7% and 11.2%, respectively.

The Company’s largest owner-occupied and commercial and industrial lending concentration by industry is retail trade at 7.7% of total business lending, followed by health care and social assistance at 2.8% and real estate rental and leasing at 2.4%.

These levels demonstrate the Company’s diversity in the lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) accounting for more than 13% of the CRE portfolio and a very low level of commercial real estate lending being conducted in major metropolitan areas.

Loans ended the second quarter at $10.02 billion, $319.3 million, or 3.3%, higher than December 31, 2023 ending loans and $853.1 million, or 9.3%, higher than June 30, 2023.

Mortgages on commercial property combined with general-purpose business lending to commercial, industrial, non-profit and municipal customers and vehicle dealer floor plan financing is characterized as the Company’s business lending activity.

The business lending portfolio increased $460.5 million, or 12.0%, from June 30, 2023, and $209.8 million, or 5.1%, from December 31, 2023, driven by net organic growth over both periods.

Business non-real estate loans, including commercial and industrial lending, increased $92.7 million, or 9.3%, owner-occupied commercial real estate increased $63.9 million, or 8.5%, multifamily increased $43.9 million, or 7.1%, and non-owner occupied commercial real estate increased $9.3 million, or 0.5%, as compared to December 31, 2023.

While certain macroeconomic concerns are persisting related to non-owner occupied and multifamily commercial real estate, the Company’s exposure to these portfolios is diverse both geographically and by industry type, and remains relatively low at 15% of total assets, 24% of total loans and 198% of total bank-level regulatory capital.

Commercial real estate lending represents 74.5% of the total business lending portfolio at June 30, 2024 while other business lending including commercial and industrial loans represents the remaining 25.5% of total business lending.

The Company’s largest non-owner occupied commercial real estate lending concentration by property type is multifamily at 20.7% of total commercial real estate lending, followed by office at 11.5% and commercial construction, at 10.7%.

The Company’s largest owner-occupied commercial real estate lending concentration by industry is retail trade at 8.3% of total commercial real estate lending, followed by health care and social assistance at 2.8% and real estate rental and leasing at 2.7%.

These levels demonstrate the Company’s diversity in the business lending portfolio, as there are no significant industry or geographic concentrations, no metropolitan statistical area (“MSA”) accounting for more than 13% of the CRE portfolio and a very low level of commercial real estate lending being conducted in major metropolitan areas.

See Table 7 below for concentrations of CRE lending by borrower type and Table 8 below for concentrations of CRE by property location.

The balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the Company’s market areas.

Competitive conditions for business lending continue to prevail in both the digital marketplace and geographic regions in which the Company operates.

The balance increases are reflective of continued high demand for multi-family housing, expansion of internal resources and proactive business development and pricing in the Company’s market areas, as well as the Company’s solid liquidity profile relative to competitors that creates opportunities to gain market share.

The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins.

The Company expects the composition of its growth in its business lending portfolio over the remaining three quarters of 2024 to be a proportionally higher balance of business non-real estate lending as compared to commercial real estate lending than that experienced by the Company over the past several years, in order to maintain the overall concentration of its CRE portfolio.

The Company expects the composition of its growth in its business lending portfolio over the remaining two quarters of 2024 to be a proportionally higher for business non-real estate lending than commercial real estate lending compared to what was experienced by the Company over the past several years, in order to maintain the overall concentration of its CRE portfolio.

The Company continues to invest in additional personnel, technology and business development resources to further strengthen its capabilities in this important product category.

The following table presents the concentration by borrower type of the Company’s CRE loan balances as of March 31, 2024:

To assist our business lending customers in managing their interest rate risk, the Company enters into interest rate swaps which have associated interest rate and credit risk;

for additional detail on the Company’s use of interest rate swaps, see Note L beginning on page 34 of this Form 10-Q.

The following table presents the concentration by borrower type of the Company’s CRE loan balances as of June 30, 2024:

Concentrations of CRE Lending by Borrower Type

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Other Services

Manufacturing

Agriculture and Forestry

Arts, Entertainment and Recreation

Agriculture and Forestry

Manufacturing

Accommodation and Food Services

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Total owner occupied CRE

The following table presents the geographic concentrations of the Company’s CRE loan balances by property location (MSA) as of March 31, 2024:

The following table presents the geographic concentrations of the Company’s CRE loan balances by property location (MSA) as of June 30, 2024:

Concentrations of CRE by Property Location

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Burlington-South Burlington, VT

Rochester, NY

Buffalo-Cheektowaga, NY

Rochester, NY

Scranton Wilkes-Barre, PA

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Consumer mortgages increased $296.1 million, or 9.6%, from one year ago and increased $83.1 million, or 2.5%, from December 31, 2023, with the increases over both periods representing net organic growth and included the impact of certain secondary market sales of organic production.

The Company sold $1.2 million and $6.8 million of consumer mortgage production during the first quarter of 2024 and over the last year, respectively.

The Company sold $11.6 million and $12.8 million of consumer mortgage production during the three and six months ended 2024, respectively.

Over the past year, the Company produced net organic growth in the consumer mortgage segment due to the Company’s competitive product offerings, recruitment of additional mortgage loan originators and proactive business development efforts, while also benefitting from the comparatively stable housing market conditions in the Company’s primary markets relative to the national environment.

Reflective of the higher interest rate environment and consumer expectations of future interest rate movements, the consumer mortgage growth produced over the last quarter is comprised of a higher proportion of adjustable rate loans than experienced in recent periods.

During the first quarter of 2024, approximately 32% of the net consumer mortgage growth is comprised of adjustable rate loans compared to approximately 9% over the last twelve months.

During the first six months of 2024, approximately 30% of the net consumer mortgage growth is comprised of adjustable rate loans compared to approximately 13% over the last twelve months.

The Company expects this trend to continue during the remainder of 2024.

Home equity loans increased $14.0 million, or 3.2%, from one year ago and decreased $0.5 million, or 0.1%, from December 31, 2023, in part a result of lower levels of consumer mortgage refinancing-related payoffs and paydowns in the higher interest rate environment.

Home equity loans increased $12.8 million, or 2.9%, from one year ago and increased $5.5 million, or 1.2%, from December 31, 2023, in part a result of lower levels of payoffs and paydowns related to consumer mortgage refinancing in the higher interest rate environment.

Consumer installment loans, both those originated directly in the branches and online (referred to as “consumer direct”) and indirectly in automobile, marine and recreational vehicle dealerships (referred to as “consumer indirect”), increased $83.7 million, or 4.6%, from one year ago, and increased $20.8 million, or 1.1%, from December 31, 2023.

The increase was primarily due to the Company offering competitive pricing, benefitting from reduced participation by certain competitors and capturing an increased share of the sales volumes that existed in its market area and dealer network, which, combined with higher vehicle sales prices, resulted in growth in the Company’s consumer installment portfolio.

The increases were primarily due to the Company offering competitive pricing, benefitting from reduced participation by certain competitors and capturing an increased share of the sales volumes that existed in its market area and dealer network, which resulted in growth in the Company’s consumer installment portfolio.

Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining a profitable in-market and contiguous market indirect portfolio, while continuing to pursue the expansion of its dealer network.

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Allowance for Credit Losses by Loan Type

March 31, 2024

June 30, 2024

December 31, 2023

March 31, 2023

June 30, 2023

(000’s omitted except for ratios)

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The unallocated allowance is maintained for potential inherent losses in the specific portfolios that are not captured due to model imprecision.

The unallocated allowance of $1.0 million at March 31, 2024 was consistent with December 31, 2023 and March 31, 2023.

The unallocated allowance of $1.0 million at June 30, 2024 was consistent with December 31, 2023 and June 30, 2023.

The changes in allowance allocations reflect management’s continued refinement of its loss estimation techniques.

Management considers the allocated and unallocated portions of the allowance for credit losses to be prudent and reasonable.

Allowance for credit losses, nonaccrual loans and loan net charge-off ratios are as follows:

Allowance for credit losses and loan net charge-off ratios are as follows:

Allowance for credit losses/total loans

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Consumer direct

The net charge-offs during the first quarter of 2024 were $2.8 million, $1.3 million higher than the first quarter of 2023, with all portfolios experiencing higher net charge-off levels than the prior year.

The total net charge-off ratio (net charge-offs as a percentage of average loans outstanding) for the first quarter of 2024 was 0.12%, five basis points higher than the first quarter of 2023, and two basis points above the level at the fourth quarter of 2023.

Net charge-off ratios for the first quarter of 2024 for all loan portfolios were stable as compared to the Company’s average for the trailing eight quarters.

Economic conditions are also relatively stable, with the unemployment rate in particular remaining low and supporting the moderate levels of net charge-offs experienced by the Company as compared to its historical trends.

Other real estate owned (“OREO”) at March 31, 2024 was $1.7 million as compared to $0.5 million at March 31, 2023 and $1.2 million at December 31, 2023.

At March 31, 2024, OREO consisted of 23 residential properties with a total value of $1.3 million and two commercial properties with a total value of $0.4 million.

This compares to 21 residential properties with a total value of $1.1 million and one commercial property with a value of $0.1 million at December 31, 2023, and eight residential properties with a total value of $0.5 million and no commercial properties at March 31, 2023.

Net charge-offs during the second quarter of 2024 were $1.3 million, an increase of $0.6 million compared to the second quarter of 2023.

Compared with the second quarter of 2023, the consumer installment portfolios experienced higher net charge-off levels while the business lending, consumer mortgage and home equity portfolios were below prior year levels.

The total net charge-off ratio (net charge-offs annualized as a percentage of average loans outstanding for the quarter) for the second quarter was 0.05%, five basis points lower than the ratio for the fourth quarter of 2023 and two basis points higher than the ratio for the second quarter of 2023.

Net charge-off ratios for the second quarter of 2024 for the business lending, consumer direct and home equity portfolios were above the Company’s average for the trailing eight quarters, while the net charge-off ratio for the consumer mortgage and consumer indirect portfolios were below the Company’s average for the trailing eight quarters.

Economic conditions continue to be relatively stable, supporting the moderate levels of net charge-offs experienced by the Company as compared to its historical trends.

Other real estate owned (“OREO”) at June 30, 2024 was $1.7 million.

This compares to $1.2 million at December 31, 2023 and $0.6 million at June 30, 2023.

At June 30, 2024, OREO consisted of 24 residential properties with a total value of $1.4 million and one commercial property with a value of $0.3 million.

This compares to 21 residential properties with a total value of $1.1 million and one commercial property with a value of $0.1 million at December 31, 2023, and 11 residential properties with a total value of $0.6 million at June 30, 2023.

The increase in OREO over the last twelve months was primarily driven by the Company working through a backlog of residential foreclosures that arose due to pandemic-related moratoriums that have since been lifted.

Approximately 31% of the nonperforming loans at March 31, 2024 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry and property type.

Approximately 34% of the nonperforming loans at June 30, 2024 were related to the business lending portfolio, which is comprised of business loans broadly diversified by industry and property type.

Of the nonperforming loans in the business lending portfolio, non-owner occupied commercial real estate represents 75% of the balances, owner-occupied commercial real estate represents 20% of the balances, and other commercial and industrial loans represents 5% of the balances.

There are no nonperforming multifamily loans.

The level of nonperforming business loans increased from the prior year primarily due to changes in the financial conditions and loan repayment performance of three business lending relationships that were individually assessed for a specific allocation of the allowance for credit losses.

Approximately 61% of nonperforming loans at March 31, 2024 were comprised of consumer mortgages.

There is an immaterial amount of nonperforming multifamily loans.

The level of nonperforming business loans increased from the prior year primarily due to changes in the financial conditions and loan repayment performance of four business lending relationships that were individually assessed for a specific allocation of the allowance for credit losses.

Approximately 59% of nonperforming loans at June 30, 2024 were comprised of consumer mortgages.

Collateral values of residential properties within most of the Company’s market areas have generally remained stable or increased over the past several years.

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The remaining 7% of nonperforming loans relate to consumer installment and home equity loans, with home equity nonperforming loan levels being driven by the same factors that were identified for consumer mortgages.

The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 142% at the end of the first quarter, as compared to 122% at year-end 2023 and 187% at March 31, 2023.

The decrease in this ratio between the annual quarterly periods was due to nonperforming loans increasing proportionally more than the allowance for credit losses, primarily driven by the aforementioned increase in nonperforming business lending loans.

The allowance for credit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 141% at the end of the second quarter, as compared to 122% at year-end 2023 and 190% at June 30, 2023.

The decrease in this ratio versus one year ago was due to nonperforming loans increasing proportionally more than the allowance for credit losses, primarily driven by the aforementioned increase in nonperforming business lending loans.

The Company’s senior management, special asset officers and business lending management review all delinquent and nonaccrual loans and OREO regularly in order to identify deteriorating situations, monitor known problem credits and discuss any needed changes to collection efforts, if warranted.

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Business lending management reviews the criticized business loan portfolio on a monthly basis.

Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 0.93% at the end of the first quarter of 2024, 13 basis points below the year-end 2023 ratio of 1.06% and 20 basis points above the March 31, 2023 ratio of 0.73%.

The business lending delinquency ratio at the end of the first quarter was 16 basis points below the level at December 31, 2023 and 19 basis points above the level at March 31, 2023.

The delinquency rates for the consumer mortgage, consumer indirect, consumer direct and home equity portfolios all increased as compared to the levels at March 31, 2023, however, all portfolio segments except for home equity decreased as compared to their levels at December 31, 2023.

The Company recorded a $6.1 million provision for credit losses in the first quarter of 2024.

The first quarter provision for credit losses was $2.6 million higher than the equivalent prior year period’s provision for credit losses of $3.5 million.

The allowance for credit losses of $70.1 million as of March 31, 2024 increased $6.9 million from the level one year ago.

Delinquent loans (defined as loans 30 days or more past due or in nonaccrual status) as a percent of total loans was 0.95% at the end of the second quarter, 11 basis points below the 1.06% at year-end 2023 and 12 basis points above the 0.83% at June 30, 2023.

The business lending delinquency ratio at the end of the second quarter of 0.42% was 19 basis points below the level of 0.61% at December 31, 2023 and one basis point above the level of 0.41% at June 30, 2023.

The delinquency rates for all loan portfolios except for consumer direct decreased as compared to the levels at December 31, 2023.

The delinquency rates for all loan portfolios increased as compared to the levels at June 30, 2023.

The Company recorded a $2.7 million provision for credit losses in the second quarter of 2024.

The second quarter provision for credit losses was $1.9 million higher than the equivalent prior year period’s provision for credit losses of $0.8 million.

The allowance for credit losses of $71.4 million as of June 30, 2024 increased $8.1 million from the level one year ago.

While economic forecasts remained stable, the current quarter provision for credit losses is reflective of an increase in loan balances and the Company increasing its qualitative assessment of future uncertainty and building credit loss reserves, with a primary focus on the business lending and consumer indirect portfolios.

The allowance for credit losses to total loans ratio was 0.71% at March 31, 2024, one basis point higher than the level at March 31, 2023 and two basis points higher than the level at December 31, 2023.

The allowance for credit losses to total loans ratio was 0.71% at June 30, 2024, two basis points higher than the levels at December 31, 2023 and June 30, 2023.

Refer to Note E:

Loans and Allowance for Credit Losses in the notes to the consolidated financial statements for a discussion of management’s methodology used to estimate the allowance for credit losses.

As of March 31, 2024, the net purchase discount related to the $1.01 billion of remaining non-PCD loan balances acquired through prior period acquisition transactions was approximately $20.0 million, or 2.0% of that portfolio.

As shown in Table 11, average deposits of $13.03 billion in the first quarter were $63.9 million, or 0.5%, higher than the first quarter of 2023.

Total average deposit balances increased $59.3 million, or 0.5%, from the fourth quarter of last year, while on an ending basis, total deposits increased $423.9 million, or 3.3%, from December 31, 2023.

As of June 30, 2024, the net purchase discount related to the $972.3 million of remaining non-purchased credit deteriorated (“PCD”) loan balances acquired through prior period acquisition transactions was approximately $19.1 million, or 2.0% of that portfolio.

As shown in Table 11, average deposits of $13.21 billion in the second quarter were $324.3 million, or 2.5%, higher than the second quarter of 2023 and increased $240.1 million, or 1.9%, from the fourth quarter of last year.

On an ending basis, total deposits increased $209.8 million, or 1.6%, from December 31, 2023 and were $266.1 million, or 2.1%, higher than one year prior, primarily driven by higher public fund deposit balances.

The mix of average deposit balances changed as the weighting of non-maturity deposits (noninterest checking, interest checking, savings and money markets) to total deposits has decreased from the prior year levels.

Average noninterest checking deposits as a percentage of average total deposits was 27.4% in the first quarter compared to 31.2% in the first quarter of 2023 and 28.6% in the fourth quarter of last year.

Average non-maturity deposits represented 85.7% of the Company’s average deposit funding base in the first quarter of 2024, while time deposits represented 14.3% of total average deposits.

In comparison, time deposits represented 7.4% of total average deposits during the first quarter of 2023 and 12.3% of total average deposits during the fourth quarter of last year due in part to customers responding to changes in market interest rates by moving funds into higher yielding time deposit accounts.

The quarterly average cost of deposits was 1.14% for the first quarter of 2024, compared to 0.31% in the first quarter of 2023, reflective of the increase in the average interest rate paid on interest-bearing deposits as interest rates on certain interest-bearing deposits were raised in response to market conditions, as well as a decline in the proportion of noninterest and low-rate deposit balances.

Average noninterest checking deposits as a percentage of average total deposits was 26.7% in the second quarter compared to 29.8% in the second quarter of 2023 and 28.6% in the fourth quarter of last year.

Average non-maturity deposits represented 84.7% of the Company’s average deposit funding base in the second quarter of 2024, while time deposits represented 15.3% of total average deposits.

In comparison, time deposits represented 9.1% of total average deposits during the second quarter of 2023 and 12.3% of total average deposits during the fourth quarter of last year, due in part to customers responding to changes in market interest rates by moving funds into higher yielding time deposit accounts.

The quarterly average cost of deposits was 1.23% for the second quarter of 2024, compared to 0.59% in the second quarter of 2023, reflective of the increase in the average interest rate paid on interest-bearing deposits as interest rates on certain interest-bearing deposits were raised in response to market conditions, as well as a decline in the proportion of noninterest and low-rate deposit balances.

The Company continues to focus on expanding its deposit relationship base through its competitive product offerings and high-quality customer service.

The Company’s deposit base is well diversified across customer segments, which as of March 31, 2024 is comprised of approximately 60% consumer, 25% business and 15% municipal, and broadly dispersed with an average consumer deposit account balance of approximately $12,000 and average business deposit relationship of approximately $62,000, while the Company’s total average deposit account balance is under $20,000.

The Company’s deposit base is well diversified across customer segments, which as of June 30, 2024 is comprised of approximately 61% consumer, 26% business and 13% municipal, and broadly dispersed with an average consumer deposit balance per account of approximately $12,000 and average business deposit relationship of approximately $68,000, while the Company’s total average deposit balance per account is under $20,000.

In addition, at the end of the quarter, 66% of the Company’s total deposit balances were in checking and low-rate savings accounts and the weighted-average age of the Company’s non-maturity deposit accounts was approximately 15 years.

The total estimated amount of deposits that exceeded the $250,000 insured limit provided by the FDIC, net of collateralized and intercompany deposits, was approximately $2.12 billion at March 31, 2024.

The total estimated amount of deposits that exceeded the $250,000 insured limit provided by the FDIC, net of collateralized and intercompany deposits, was approximately $2.14 billion at June 30, 2024.

This amount is determined by adjusting the amounts reported in the Bank Call Report by intercompany deposits, which are not external customers and are therefore eliminated in consolidation, and municipal deposits whose uninsured balances are collateralized by certain pledged investment securities.

The Bank Call Report estimated uninsured deposit balances at March 31, 2024 are reported gross at $4.27 billion, which includes intercompany account balances of $334.8 million, and collateralized deposits of $1.81 billion.

Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of ending total deposits at March 31, 2024.

The Bank Call Report estimated uninsured deposit balances at June 30, 2024 are reported gross at $4.06 billion, which includes intercompany account balances of $358.4 million, and collateralized deposits of $1.56 billion.

Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of ending total deposits at June 30, 2024.

These estimates are based on the determination of known deposit account balances of each depositor and the insurance guidelines provided by the FDIC.

Average nonpublic fund deposits for the first quarter of 2024 decreased $100.7 million, or 0.9%, versus the fourth quarter of 2023 and decreased $308.5 million, or 2.7%, versus the year-earlier period due in part to increased rate competition from other banks and non-depository financial institutions.

Average public fund deposits for the first quarter increased $160.0 million, or 9.7%, from the fourth quarter of 2023 primarily due to the seasonal receipt of property tax payments and increased $372.5 million, or 26.0%, from the first quarter of 2023, reflective of competitive pricing offerings and expansion of its municipal deposit relationship base due to the Company’s business development efforts.

Average public fund deposits as a percentage of total average deposits increased from 11.0% in the first quarter of 2023 to 13.8% in the first quarter of 2024.

Average nonpublic fund deposits for the second quarter of 2024 increased $2.1 million versus the fourth quarter of 2023 and decreased $62.6 million, or 0.5%, versus the year-earlier period, due in part to increased rate competition from other banks and non-depository institutions.

Average public fund deposits for the second quarter increased $238.0 million, or 14.5%, from the fourth quarter of 2023 and $386.9 million, or 25.9%, from the second quarter of 2023, reflective of competitive offerings and expansion of its municipal deposit relationship base due in part to the Company’s business development efforts.

Average public fund deposits as a percentage of total average deposits increased from 11.6% in the second quarter of 2023 to 14.2% in the second quarter of 2024.

Quarterly Average Deposits

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Nonpublic fund deposits

Public fund deposits

Municipal deposits

Total deposits

Borrowings, excluding securities sold under agreement to repurchase, at the end of the first quarter of 2024 totaled $395.1 million.

This was $65.5 million, or 14.2%, lower than borrowings at December 31, 2023 and $319.4 million above the level at the end of the first quarter of 2023.

The increase from the prior year first quarter was due to an increase in other FHLB borrowings of $377.8 million, partially offset by a decrease in overnight borrowings of $58.4 million, as the Company secured fixed rate FHLB term borrowings in the third and fourth quarters of 2023 to support the funding of continued loan growth.

The decrease from the fourth quarter of 2023 was primarily related to a decrease in overnight borrowings of $53.0 million and maturities of other FHLB borrowings primarily associated with the amortizing advances secured in the prior year.

Borrowings, excluding securities sold under agreement to repurchase, at the end of the second quarter of 2024 totaled $716.7 million.

This was $256.1 million higher than borrowings at December 31, 2023 and $465.4 million above the level at the end of the second quarter of 2023.

The increase from the prior year second quarter was due to an increase in other FHLB borrowings of $516.4 million and the commencement of $5.4 million of finance lease liabilities, partially offset by a decrease in overnight borrowings of $56.4 million, as the Company secured fixed rate FHLB term borrowings in the third and fourth quarters of 2023 and second quarter of 2024 to support the funding of continued loan growth.

The increase from the fourth quarter of 2023 was primarily related to additional FHLB term borrowings being secured in the second quarter, an increase in overnight borrowings of $124.6 million, and $5.4 million of finance lease liabilities commencing in the second quarter of 2024 in connection with the Company’s de novo branch expansions.

During January 2024, the Company secured $300.0 million in short-term borrowings through the Federal Reserve’s Bank Term Funding Program at a rate of 4.87% to fund expected net loan growth.

These short-term borrowings matured during March 2024 and the Bank Term Funding Program has ceased making new loans as of March 11, 2024.

During June 2024, three $50.0 million putable advances were executed with the FHLB for a total of $150.0 million in new term borrowings.

The advances are putable at the option of the FHLB in June 2025 and mature in June 2027 if the option is not exercised, at interest rates ranging from 4.38% to 4.47%.

Securities sold under agreement to repurchase, also referred to as customer repurchase agreements, represent collateralized municipal and commercial funding from customers that price and operate similar to a deposit instrument.

Customer repurchase agreements were $287.2 million at the end of the first quarter of 2024, $17.4 million lower than both December 31, 2023 and March 31, 2023.

Customer repurchase agreements were $215.5 million at the end of the second quarter of 2024, $89.1 million lower than December 31, 2023, due primarily to the seasonal characteristics of this portfolio, and $18.0 million lower than June 30, 2023.

Shareholders’ Equity and Regulatory Capital

Total shareholders’ equity of $1.66 billion at the end of the first quarter of 2024 represents a decrease of $41.0 million from the balance at December 31, 2023.

Total shareholders’ equity of $1.67 billion at the end of the second quarter of 2024 represents a decrease of $27.8 million from the balance at December 31, 2023.

The decrease was driven by common stock repurchased of $45.8 million, an increase in accumulated other comprehensive loss of $28.9 million, and common stock dividends declared of $47.5 million, partially offset by net income of $88.8 million, stock-based compensation of $4.4 million and net activity under the Company’s employee stock plans of $1.2 million.

The increase in accumulated other comprehensive loss was comprised of $29.6 million of other comprehensive loss related to the Company’s investment securities portfolio, including a net decrease in the after-tax market value adjustment on the available-for-sale investment portfolio as medium and long-term market interest rates increased between the periods, partially offset by $0.7 million of other comprehensive income associated with adjustments to the overfunded status of the Company’s employee retirement plans.

Over the past 12 months, total shareholders’ equity increased $22.9 million, as net income, the issuance of common stock in association with the employee stock plans and adjustments to the overfunded status of the Company’s employee retirement plans more than offset a decrease in the after-tax market value adjustment on investments, common stock dividends declared, and common stock repurchase activity.

The dividend payout ratio (dividends declared divided by net income) for the first quarter of 2024 was 58.1%, compared to 409.1% for the first quarter of 2023.

Excluding the after-tax impact of the loss on sales of investment securities, the first quarter of 2023 dividend payout ratio was 50.5%.

First quarter dividends declared increased 0.1% versus one year earlier, as the Company’s quarterly dividend per share was raised from $0.44 to $0.45 in the third quarter of 2023, while total shares outstanding decreased 1.8% as common stock repurchases outweighed issuances from the Company’s employee stock plans.

The 2023 dividend increase marked the Company’s 31 st consecutive year of increased dividend payouts to common shareholders.

Over the past 12 months, total shareholders’ equity increased $52.8 million, as net income, the issuance of common stock in association with the employee stock plans, adjustments to the overfunded status of the Company’s employee retirement plans and a decrease in accumulated other comprehensive loss related to the Company’s investment securities portfolio more than offset common stock dividends declared and common stock repurchase activity.

The dividend payout ratio (dividends declared divided by net income) for the first six months of 2024 was 53.5%, compared to 87.7% for the first six months of 2023.

Excluding the after-tax impact of the loss on sales of investment securities, the dividend payout ratio for the first six months of 2023 was 49.8%.

Second quarter dividends declared increased 0.4% versus one year earlier, as the Company’s quarterly dividend per share was raised from $0.44 to $0.45 in the third quarter of 2023, while total shares outstanding decreased 1.9% as common stock repurchases outweighed issuances from the Company’s employee stock plans.

During the third quarter of 2024, the Company announced a one cent, or 2.2%, increase in the quarterly dividend to $0.46 per share on its common stock, which marked the 32 nd consecutive year of dividend increases for the Company.

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s dividend paying ability and financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital ratio guidelines that involve quantitative measures of the Company’s and the Bank’s assets and certain liabilities and off-balance sheet items as calculated under regulatory accounting practices.

The Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Company and the Bank are required to maintain a capital conservation buffer (“CCB”), composed entirely of common equity Tier 1 capital, in addition to minimum risk-based capital ratios.

The required capital conservation buffer is 2.5% as of March 31, 2024 and December 31, 2023.

Therefore, to satisfy both the minimum risk-based capital ratios and the CCB as of March 31, 2024 and December 31, 2023, the Company and the Bank must maintain:

Under capital adequacy guidelines and the regulatory framework for prompt corrective action (“PCA”), the Company and the Bank must meet specific capital ratio guidelines that involve quantitative measures of the Company’s and the Bank’s assets and certain liabilities and off-balance sheet items as calculated under regulatory accounting practices.

The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about the treatment of capital components, the risk weightings of assets and other factors.

The Company and the Bank are required to maintain a capital conservation buffer (“CCB”), composed entirely of common equity Tier 1 capital, in addition to capital sufficient to meet minimum risk-based capital ratios.

The required capital conservation buffer is 2.5% as of June 30, 2024 and December 31, 2023.

Therefore, to satisfy both the PCA adequately capitalized minimum risk-based capital ratios and the CCB as of June 30, 2024 and December 31, 2023, the Company and the Bank must maintain:

(i) Common equity Tier 1 capital to total risk-weighted assets (“Common equity tier 1 capital ratio”) of at least 7.0%,

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In addition, the Company and Bank must maintain a ratio of ending Tier 1 capital to adjusted quarterly average assets (“Tier 1 leverage ratio”) of at least 5.0% to be considered “well capitalized” under the regulatory framework for prompt corrective action (not subject to CCB requirements).

As of March 31, 2024 and December 31, 2023, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”.

As of March 31, 2024 and December 31, 2023, the regulatory capital ratios for the Company and Bank are presented below.

As of June 30, 2024 and December 31, 2023, the Company and Bank meet all applicable capital adequacy requirements to be considered “well capitalized”.

As of June 30, 2024 and December 31, 2023, the regulatory capital ratios for the Company and Bank are presented below.

Regulatory Ratios

March 31, 2024

June 30, 2024

December 31, 2023

March 31, 2023

Community Bank

June 30, 2023

Tier 1 leverage ratio

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Total risk-based capital ratio

The Company’s tier 1 leverage ratio was 9.01% at the end of the first quarter, down 33 basis points from December 31, 2023 and five basis points below its level one year earlier.

The decrease in the Tier 1 leverage ratio in comparison to December 31, 2023 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income or loss items, decreasing 1.4%, primarily as a result of common share repurchases, while average assets, excluding intangibles and the market value adjustment on available-for-sale investment securities, increased 2.2%, primarily due to organic loan growth and an increase in cash equivalent balances driven by net deposit inflows.

The Tier 1 leverage ratio decreased compared to the prior year’s first quarter as average assets, excluding intangibles and the market value adjustment, increased 2.4% primarily due to organic loan growth and an increase in cash equivalent balances driven by net funding inflows, while shareholders’ equity, excluding intangibles and other comprehensive income or loss items, increased a lesser 1.9% as the impact of net earnings retention outweighed share repurchases.

The shareholders’ equity-to-assets ratio was 10.45% at the end of the first quarter of 2024 compared to 10.92% at December 31, 2023 and 10.71% at March 31, 2023.

The tangible equity-to-tangible assets ratio, a non-GAAP measure, of 5.32% decreased 0.43 percentage points from December 31, 2023 and decreased 0.09 percentage points versus March 31, 2023 (see Table 14 for Reconciliation of Quarterly GAAP to Non-GAAP Measures).

The decrease in the tangible equity-to-tangible assets ratio, a non-GAAP measure, from one year prior was driven by a $599.3 million, or 4.2%, increase in tangible assets, a non-GAAP measure, due primarily to organic loan growth, while tangible equity, a non-GAAP measure, increased $19.5 million, or 2.5%, as net income retention outweighed the impact of share repurchases between the periods but lagged the growth rate of tangible assets.

The decrease in the tangible equity-to-tangible assets ratio, a non-GAAP measure, from December 31, 2023 was driven by a $47.2 million, or 5.6%, decrease in tangible equity, a non-GAAP measure, due mainly to share repurchases, while tangible assets, a non-GAAP measure, increased $296.7 million, or 2.0%, primarily due to organic loan growth and an increase in cash equivalent balances driven by net deposit inflows.

The Company’s tier 1 leverage ratio was 9.07% at the end of the second quarter, down 27 basis points from December 31, 2023 and 28 basis points below its level one year earlier.

The decrease in the Tier 1 leverage ratio in comparison to December 31, 2023 was the result of ending shareholders’ equity, excluding intangibles and other comprehensive income or loss items, decreasing 0.5%, primarily as a result of common share repurchases, while average assets, excluding intangibles and the market value adjustment on available-for-sale investment securities, increased 2.5%, primarily due to organic loan growth.

The Tier 1 leverage ratio decreased compared to the prior year’s second quarter as average assets, excluding intangibles and the market value adjustment, increased 4.7% primarily due to organic loan growth, while shareholders’ equity, excluding intangibles and other comprehensive income or loss items, increased 1.7% as the impact of net earnings retention outweighed share repurchases.

The shareholders’ equity-to-assets ratio was 10.50% at the end of the second quarter of 2024 compared to 10.92% at December 31, 2023 and 10.71% at June 30, 2023.

The tangible equity-to-tangible assets ratio, a non-GAAP measure, of 5.38% decreased 0.37 percentage points from December 31, 2023 and increased 0.04 percentage points versus June 30, 2023 (see Table 14 for Reconciliation of Quarterly GAAP to Non-GAAP Measures).

The increase in the tangible equity-to-tangible assets ratio, a non-GAAP measure, from one year prior was driven by a $48.6 million, or 6.4%, increase in tangible equity, a non-GAAP measure, as net income retention and a decrease in accumulated other comprehensive loss primarily associated with the investment securities portfolio outweighed the impact of share repurchases between the periods, while tangible assets, a non-GAAP measure, increased $794.6 million, or 5.6%, due primarily to organic loan growth.

The decrease in the tangible equity-to-tangible assets ratio, a non-GAAP measure, from December 31, 2023 was driven by a $35.8 million, or 4.2%, decrease in tangible equity, a non-GAAP measure, due mainly to share repurchases, while tangible assets, a non-GAAP measure, increased $343.0 million, or 2.3%, primarily due to organic loan growth.

Liquidity risk is a measure of the Company’s ability to raise cash when needed at a reasonable cost and minimize any loss.

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Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements, large certificates of deposit and the brokered CD market.

The primary sources of funds are deposits, which were $13.35 billion at March 31, 2024.

The primary sources of funds are deposits, which were $13.14 billion at June 30, 2024.

The primary sources of non-deposit funds are customer repurchase agreements, and FHLB and FRB overnight advances and term borrowings.

At March 31, 2024, there were $287.2 million of customer repurchase agreements, no overnight borrowings, and $395.1 million of FHLB term borrowings outstanding.

At June 30, 2024, there were $215.5 million of customer repurchase agreements, $177.6 million of overnight borrowings, and $533.8 million of FHLB term borrowings outstanding.

The Company’s primary sources of available liquidity include cash and cash equivalents, borrowing capacity at the FHLB and FRB, as well as net unpledged investment securities that could be sold, subject to market conditions, or used to collateralize additional funding.

Table 13 below details the available sources of liquidity at March 31, 2024.

In addition, there was $25.0 million available in an unsecured line of credit with a correspondent bank at year end.

The Company’s sources of immediately available liquidity of $4.60 billion as of March 31, 2024 represent over 200% of the Company’s estimated uninsured deposits (deposits in excess of FDIC limits), net of collateralized and intercompany deposits (“net estimated uninsured deposits”), estimated to be approximately $2.12 billion.

Table 13 below details the available sources of liquidity at June 30, 2024.

In addition, there was $25.0 million available in an unsecured line of credit with a correspondent bank at June 30, 2024.

The Company’s sources of immediately available liquidity of $4.44 billion as of June 30, 2024 represent over 200% of the Company’s estimated uninsured deposits (deposits in excess of FDIC limits), net of collateralized and intercompany deposits (“net estimated uninsured deposits”), estimated to be approximately $2.14 billion.

Sources of Liquidity

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and second, a projection of subsequent cash availability over an additional 60 days.

As of March 31, 2024, this ratio was 8.6% for 30-days and 8.1% for 90-days, excluding the Company's capacity to borrow additional funds from the FHLB and other sources.

As of June 30, 2024, this ratio was 9.7% for 30-days and 9.2% for 90-days, excluding the Company’s capacity to borrow additional funds from the FHLB and other sources.

This is considered to be a sufficient amount of liquidity based on the Company’s internal policy requirement of 7.5%.

To measure intermediate risk over the next twelve months, the Company reviews a sources and uses projection.

As of March 31, 2024, there is sufficient liquidity available during the next year to cover projected cash outflows.

As of June 30, 2024, there is sufficient liquidity available during the next year to cover projected cash outflows.

In addition, stress tests on the cash flows are performed for various scenarios ranging from high probability events with a low impact on the liquidity position to low probability events with a high impact on the liquidity position.

The results of the stress tests as of March 31, 2024 indicate the Company has sufficient sources of liquidity for the next year in all simulated stressed scenarios.

The results of the stress tests as of June 30, 2024 indicate the Company has sufficient sources of liquidity for the next year in all simulated stressed scenarios.

To measure longer-term liquidity, a baseline projection of growth in interest-earning assets and interest-bearing liabilities for five years is made to reflect how liquidity levels could change over time.

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core liquidity and funding needs such as the core basic surplus, unencumbered securities to average assets, and free FHLB and FRB loan collateral to average assets;

heightened funding needs indicators such as average loans to average deposits, average public and nonpublic deposits to total funding, and average borrowings to total funding;

heightened funding needs indicators such as average loans to average deposits, average municipal and nonmunicipal deposits to total funding, and average borrowings to total funding;

capital at risk indicators including regulatory ratios;

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Six Months Ended

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Acquisition expenses

Acquisition-related contingent consideration adjustments

Litigation accrual

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Gain on debt extinguishment

Unrealized gain on equity securities

Unrealized (gain) loss on equity securities

Amortization of intangible assets

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Acquisition expenses

Acquisition-related contingent consideration adjustments

Litigation accrual

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Gain on debt extinguishment

Unrealized gain on equity securities

Unrealized (gain) loss on equity securities

Amortization of intangible assets

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Subtotal (non-GAAP)

Acquisition-related contingent consideration adjustments

Tax effect of acquisition-related contingent consideration adjustments

Subtotal (non-GAAP)

Litigation accrual

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Subtotal (non-GAAP)

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Unrealized (gain) loss on equity securities

Tax effect of unrealized gain (loss) on equity securities

Subtotal (non-GAAP)

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Three Months Ended

Six Months Ended

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Subtotal (non-GAAP)

Acquisition-related contingent consideration adjustments

Tax effect of acquisition-related contingent consideration adjustments

Subtotal (non-GAAP)

Litigation accrual

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Subtotal (non-GAAP)

Unrealized gain on equity securities

Tax effect of unrealized gain on equity securities

Unrealized gain (loss) on equity securities

Tax effect of unrealized gain (loss) on equity securities

Subtotal (non-GAAP)

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Six Months Ended

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Gain on debt extinguishment

Unrealized gain on equity securities

Unrealized (gain) loss on equity securities

Total operating noninterest revenues (non-GAAP)

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Acquisition expenses

Acquisition-related contingent consideration adjustments

Litigation accrual

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Gain on debt extinguishment

Unrealized gain on equity securities

Unrealized (gain) loss on equity securities

Total operating revenues (non-GAAP)

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Operating efficiency ratio (non-GAAP)

Return on tangible equity (non-GAAP)

Net income (GAAP)

Average shareholders’ equity

Average goodwill and intangible assets, net

Average deferred taxes on goodwill and intangible assets, net

Average tangible common equity (non-GAAP)

Return on tangible equity (non-GAAP)

Operating return on tangible equity (non-GAAP)

Operating net income (non-GAAP)

Average tangible common equity (non-GAAP)

Operating return on tangible equity (non-GAAP)

(000’s omitted)

Total tangible assets (non-GAAP)

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Total tangible assets (non-GAAP)

Three Months Ended

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Total tangible common equity (non-GAAP)

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Tangible equity-to-tangible assets ratio at quarter end (non-GAAP)

Return on tangible equity (non-GAAP)

Net income (GAAP)

Average shareholders’ equity

Average goodwill and intangible assets, net

Average deferred taxes on goodwill and intangible assets, net

Average tangible common equity (non-GAAP)

Return on tangible equity (non-GAAP)

Operating return on tangible equity (non-GAAP)

Operating net income (non-GAAP)

Average tangible common equity (non-GAAP)

Operating return on tangible equity (non-GAAP)

Book value (GAAP)

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis